HUL shifts into growth lane in Q3 but inflation a risk

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With so much noise in Hindustan Unilever Ltd’s (HUL’s) results, it is better to step back and see the big picture. The company management says demand is recovering, but still maintains a cautious stance, saying give it a quarter or more before one can call it a trend. That may seem overcautious from an investor’s standpoint. The worst was behind us in the September quarter, and the December quarter results give no reason to turn sceptical.

Now, HUL’s 11% volume growth indeed has a base-induced bump due to demonetisation in the year-ago quarter. Still, the September quarter volumes rose by 5% compared to a 1% decline a year ago. And the December quarter’s 11% growth is off a base of a 4% decline. While both are not comparable, it does appear as if growth has strengthened. It is natural to expect volume growth to settle down in subsequent quarters.

The 17% underlying domestic consumer business growth came despite price cuts after the government cut GST (goods and services tax) rates from 28% to 18% on several fast-moving consumer goods. HUL’s financials show that its input costs as a percentage of sales declined sequentially. Although crude oil-related input costs may have turned expensive, it does not seem to have affected the company yet. This could also be attributable to a better mix.

HUL’s confidence is visible in the step-up in advertising expenses, which rose as a percentage of sales sequentially. That and higher employee costs and other expenses contributed to a slight decline in its Ebitda (earnings before interest, tax, depreciation and amortization) margin sequentially, falling by 69 basis points to 19.6%. Since the year-ago quarter’s profit after tax but before exceptional items fell by 15.8%, the December 2017 quarter’s 52.2% growth should be seen in that light.

The company’s volume growth will settle down to more normal rates in the coming quarters, although mid-FY19 will again see some base effect-linked volatility due to GST. Even if HUL’s steady-state volume growth settles in the 5-7% range, that will take it back to levels it last saw in FY16. That is a good start. Overall, expectations are that FY19 will see the economy recover and the government will take steps to give a boost to the rural economy. That could lead to a recovery in rural consumption, which should benefit the likes of HUL.

The company’s shares have risen by a fifth over six months ago as investors have been expecting the recovery, visible in its results. HUL’s shares have also done much better than peer ITC Ltd, which has been weighed down by a high tax burden and an unfavourable policy environment. HUL is just a short burst away from overtaking ITC in the market, an indication of how its fortunes have changed for the better.livemint